President Donald Trump is reportedly on the warpath when it comes to Chinese tariffs.
According to Axios and apparently confirmed with sources having knowledge of the meeting, America's leader reportedly told his staff, "I want tariffs."
FOX Business Network anchor Stuart Varney, himself a London School of Economics graduate, sought my take last Monday morning.
So stupid and so misguided that "I don't know where to begin," I responded.
There is no doubt that the allure of protectionism is strong, but the reality is that it hurts the very people it's supposed to help. And badly at that.
The legendary Art Laffer, a Reagan-era economist who is regarded as the father of supply-side economics, quickly agreed, observing, "Protectionism never works."
Then he launched in with a thought to drive the point home – and I'm paraphrasing – if protectionism worked, North Korea would be a bastion of capitalism and success.
I couldn't agree more strongly.
Never mind the politics. Let's get those off the table right now. I don't have the luxury of taking sides in my capacity as Chief Investment Strategist.
My job is to help you understand the profit potential inherent in today's complicated world, no matter how it is created or who makes the moves needed to line up your money and your profits.
History Is Very Clear…
Europe tried protectionism in the 18th century, and it failed because of the mercantilism upon which it was based. Prices rose and productivity fell as nations enacted punitive trade measures intended to stamp out cross-border transactions in the name of protecting home-grown economic strength.
Workers who were unable to improve their own personal productivity were left destitute.
The continent would try again during the 19th century using the theory that industrialism could supplant mercantilism. That failed too and, insidiously, laid the groundwork for both fascism and Nazism.
Contrary to what political leaders at the time promised, workers were left behind yet again as prices rose and jobs vanished. Protectionism didn't bring them back, but instead made their lot in life far worse. Jobs were not "saved" on anything other than a short-term basis, and competitiveness declined markedly.
I know this is counterintuitive, but hang in there with me for a moment.
Remember something we talk about frequently: Money will constantly flow to where it's treated best.
Our own history is equally painful.
The McKinley Tariff of 1890 tried to protect American producers by raising the average duty on foreign imports from 38% to 49.5%. Trade simply went elsewhere, causing GDP to fall 2% and unemployment to triple.
The Smoot-Hawley Tariff of 1930 tried to protect American agriculture specifically. Yet American exports and imports fell by more than 50%. American GDP fell 40% in only three years from 1930 to 1933. Unemployment tripled, again.
More recently there was the Country Origin of Labelling restrictions – "COOL" for short – in 2009. American producers had to spend $2.6 billion to comply with its implementation, which resulted in higher prices and fewer goods. American consumers, meanwhile, spent a staggering $9 billion more on goods and services than they would have had to, had the regulations not existed.
Presidents are not immune to this line of thinking. Like most politicians, they pander to their constituents on the assumption that this will help them get re-elected or simply "buy" votes they'll need down the line on another matter. It doesn't matter who or which party we're talking about.
For instance, President Carter tried to protect American TV makers in 1977 by enacting punitive protectionist measures against Japanese manufacturers flooding U.S. markets at the time. As expected, Japanese sales tanked, but South Korean and Taiwanese sales jumped while Mexican imports skyrocketed. What's more, all three – South Korean, Taiwanese, and Japanese – makers started assembling components inside the United States using imported sub-assemblies that were not restricted under the legislation.
President Obama tried the same thing with Chinese tires in 2009. That nation's imported tire sales immediately declined, but those from South Korea, Taiwan, and other nations immediately filled the gap. The economic cost to consumers was $900,000 per job for each of the estimated 1,200 jobs saved, according to Gary Clyde Hufbauer and Sean Lowry of the Peterson Institute. Meanwhile, consumers paid an additional $1.1 billion for tires, the prices of which shot sharply higher when the threat of Chinese competition was removed.
Trade tariffs always:
- Harm the nation trying to protect itself
- Devastate the consumers who are the intended beneficiaries
Again, I know this is hard to stomach, particularly if you're one of millions of people displaced by global trade and automation. I don't mean to diminish the impact of what you're experiencing.
Personally, in fact, I think it stinks and that our government should be taking steps to make sure the prosperity associated with global trade gets effectively (and fairly) distributed at every level. But that's a discussion for another time.
What I want you to understand in the name of higher profits is that restricting trade is not the panacea that our president (and many politicians of all stripes) believe because it means trading lots of money for less money and fewer jobs. Not the other way around.
Especially when it comes to China.
You'll get zero debate – from me at least – that China's a bully.
The Red Dragon engages in its own tariffs, currency manipulation, intellectual property theft, cyber warfare, and more. All of those things collectively suggest that it's very much a situation of "damn everybody else's interests" in the name of furthering China's rise.
So now what?
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.